Brown set to pull out of airline rescue

Cash-strapped UK airlines face a fresh funding crisis that could ground their fleets later this month as the government deal to cover them against further terrorist attacks abruptly runs out.

European Finance Ministers, including the Chancellor Gordon Brown, are this week expected to scrap the agreement struck last September to act as 'insurer of last resort' to the airlines.

At the so-called Ecofin gathering in Brussels on Wednesday, The Observer has learnt, Brown will announce that he is withdrawing state cover from UK airlines from 20 March.

Other European governments will stop providing cover from 31 March, and the United States is expected to follow suit for its own aviation industry.

If a fresh deal cannot be struck between the governments and the insurance industry before the new deadlines, the airlines will be forced to ground their fleets.

'This insurance measure is due to end throughout Europe this month and Ecofin is expected to rubberstamp the dates,' a Treasury spokesman told The Observer.

European governments patched together the special measures in the immediate aftermath of the terrorist attacks in the US on 11 September last year, after it became clear that the airlines could not obtain full cover.

Insurers raised premiums by a typical 400 per cent, both for aircraft and buildings near airports, which the airlines have had to pay despite the travel slump forcing them into financial crisis.

But the real emergency was sparked when insurers capped cover at $50 million per aircraft for third party damage to buildings or people 'outside the aircraft' in the event of more planes being used as missiles.

This was a fraction of the $750m usually demanded by leasing companies and meant planes were not covered for war liabilities, leaving them partly uninsured and therefore illegal to operate. The Government was forced to agree to pay any damages over $50m in case of another catastrophe. But this pledge is about to run out. Sources indicated that Ministers want to force the insurers to the negotiating table to thrash out fresh terms with airlines.

One source at a major UK airline said: 'There is a degree of stand-off between the Government and the insurers, with the airlines trapped in the middle. Whoever blinks first will end up paying more - but the last thing we need is another rise in costs.'